Savings Tax - European Union Savings Directive

The European Union Savings Directive (EUSD) was officially passed on June 3rd 2003 by the EU Council of Ministers and became official practice on July 1st 2005. The EUSD states that all EU member states will share details regarding people residing in one EU state who earn savings income in another EU state. Therefore this legislation will affect those of you who live in EU member states and those of you who hold joint accounts within the EU. The information within this article will also be of use to you if you simply hold an EU passport.

money bag showing offshore savings

The way the EUSD could affect you will manifest itself in two ways:

Information Exchange

If you are, say, officially a French resident yet have a bank account in Germany then under the EUSD all your customer details regarding that account will be given to the German Tax Authority and then to the French Tax Authority. This information exchange will allow the French Tax Authorities to compare the amount of interest declared by the customer to their individual tax return and then to the EUSD.

Withholding Tax

Even though the EUSD is based on the principles of an automatic exchange of information, the three EU states of Belgium, Luxembourg and Austria have chosen to operate via withholding tax. Under this option the banks instead keep tax withheld from the individuals paid interest on accounts held in other states at a 20 percent rate (increasing to 35% in July 2011). Through this option personal information regarding the individuals in question is not given to the Tax Authorities either where the person resides or where their account is. Therefore the bank will be held accountable for paying the withholding tax on the individual’s behalf. The account holders themselves have the option of obtaining information and a certificate from their local tax authority detailing where the interest payments originate from.

The status of Jersey, Guernsey and the Isle of Man

The three islands of Jersey, Guernsey and the Isle of Man, whilst not being members of the EU, have also signed up to the EUSD. As opposed to the Information Exchange they, like Belgium, Luxembourg, and Austria, have opted to use the withholding tax method. A number of other offshore jurisdictions, including Switzerland, have also gone down this road. In a bid to distinguish themselves from the traditional EU members the jurisdictions mentioned have classified the withholding tax as a retention tax.

Have you paid sign for offshore savings tax

So if you reside in an EU state and have a bank account that accrues interest in the jurisdictions mentioned then you will find that you fall under the banner of the EUSD. However if you are officially a resident outside of the EU then you will be exempt from its clutches, even if you have a passport from an EU state. Regardless you may still have to prove that you are not an EU resident if asked.

So if you do fall under the scope of the EUSD you can opt for the retention tax or information option.

Taking the withholding tax will see all the interest you have gained be subjected to a 20 percent retention tax, which is set to increase to 35 percent come July 1st 2011. However you may consider that your privacy is the deciding factor even if the tax level is above what you would expect to pay in your place of residence. Of course choosing the information exchange will mean that your identity, place of residence, your interest levels and your account details will be disclosed to the relevant tax authorities, who will also pass these details onto the EU state where you reside. You will not be subject to tax deductions on your interest. Only choosing the latter option will you affect your customer confidentiality agreements.

Also worth noting is that the EUSD doesn’t just apply to standard bank accounts. Other account types that invoke forms of saving interest are also included, such as the proceeds of sale and redemption, investment funds and also some bonds and gilts. All in all the EUSD will affect the following: Rolled over interest from paid balances, accounts credited with interest, interest gained via debt returns (i.e. bonds and Government securities), interest that is gained via the sale of aforementioned Government securities, unit trusts that have made distributions resulting in 15 percent of debt claim investments and lastly collective investment funds that have gained accumulative income when debt-claim investments have been redeemed, sold or repaid.

Types of investment that do not fall under the EUSD are: personal pensions, insurance policies, life annuities, cash winnings from lotteries etc, ordinary shares, rent from properties and shares in unit trusts.

Savings should comprise only a small section of your financial planning. For bespoke information regarding your personal financial plan talk to a specialist financial adviser.